Equity and debt, taxed apart

The last lesson gave you the holding-period idea; this one adds the rates, and the trick is to sort every fund into one of three tax buckets first. A fund with more than 65% in listed Indian equity is equity-oriented. A fund with more than 65% in debt is debt-oriented. Everything in between or outside, hybrids with 35 to 65% equity, fund-of-funds, and international funds, falls into the “other” bucket (note that a fund-of-funds is “other” even though it ultimately holds shares).

For an equity-oriented fund the numbers are the ones to memorise: a short-term gain (held up to 12 months) is taxed at 20%, and a long-term gain (held over 12 months) is taxed at 12.5%, with the first ₹1.25 lakh of long-term gain each year exempt. Work the exemption carefully, as the exam does: a ₹1,60,000 long-term gain is not taxed on the whole amount, the first ₹1.25 lakh is free, so only ₹35,000 is taxed at 12.5%, a tax of ₹4,375.

The other two buckets are simpler but different. A debt-oriented fund’s gain is added to income and taxed at the investor’s marginal slab rate, whatever the holding period, there is no special long-term rate for it. The “other” bucket splits at 24 months: short-term gains at the slab rate, long-term gains at 12.5%. Get the bucket right and the rate follows automatically. One honest caveat: tax rates and thresholds move with each Union Budget, so treat these as the current figures and confirm them before the exam, but the structure, three buckets, two holding lines, is what the exam is really testing.

Rates reflect the current Finance Act as in the workbook; confirm the figure of the day. Education for the NISM Series V-A exam, not financial advice.